The decline in China’s foreign exchange reserves signals a narrowing of trade surplus, and the central bank may increase CNH support (J.P. Morgan)
The J.P.
The J.P. Morgan report pointed out that China's foreign exchange reserves fell, suggesting that the trade surplus is narrowing. At the same time, data on the ratio of foreign exchange settlement and sales by banks on behalf of customers show that since 2026, the market's willingness to settle foreign exchange has continued to be lower than the historical average, reflecting the increased tendency of enterprises and residents to hold or purchase foreign exchange, creating pressure for capital outflows. The report focuses on the correlation between this trend and the 10-year U.S. Treasury bond yield. The logic behind it is that the narrowing trade surplus weakens the supply and demand fundamentals of the RMB, while continued capital outflows increase the pressure for exchange rate depreciation. One-sentence conclusion: China's narrowing trade surplus coexists with pressure from capital outflows, and the RMB exchange rate is under pressure. The central bank may intervene through more offshore RMB (CNH) market tools to stabilize expectations. Pros/Cons: Negative: RMB exchange rate, Hong Kong stocks and A-share assets that are highly correlated with China's economic cycle. Positive: Export-oriented companies (because their revenue is denominated in US dollars, the cost side benefits from the depreciation of the RMB). Tip: The market has partially digested the expectation of narrowing trade surplus, but the persistence of capital outflows and the intensity of policy responses will be the focus of future attention, and may not yet be fully priced in. Catalyst: Central bank signal: Whether the People's Bank of China will conduct more intervention operations in the CNH market or release new exchange rate management signals. Trade data: The actual performance of China’s import and export data in the next few months, especially the export growth rate. Sino-US interest rate spread: Further changes in the interest rate spread between China and the US Treasury will affect the flow of funds.